As sustainability and ethical investing continue to be a driving force across global markets, asset managers are exploring new ways of meeting investor demands. In Australia, active ETF managers are using the dual-access model – allowing them to run a single register for both unlisted and listed investments – to gain greater operational and investment efficiencies.
In this conversation, Portfolio Manager of Perpetual’s Ethical SRI Fund, Nathan Hughes and State Street’s Country head of Australia, Tim Helyar discuss responsible investing in Australia, investor sentiment, performance attributes, market access, and innovation across the asset management Industry.
ETF Insights Series: Ethical Investing in Australia
A conversation with Nathan Hughes of Perpetual
Tim [00:00:02] Hello and welcome to our ETF Insights Series, I'm Tim Helyar, Country Head for State Street in Australia, and I'm joined by Nathan Hughes, who is the Portfolio Manager of Perpetual's Ethical SRI fund. In today's discussion, we're going to cover how Ethical and Responsible Investment works. What is it? How is it done? And what is the trajectory looking like for ESG and Responsible Investment in Australia? So, Nathan, welcome! To get us started, can you share a brief background on ethical investing, how it's evolved and reflected in portfolios.
Nathan [00:00:33] Thanks, Tim, thanks very much for having me on your podcast. So look ethical investing really started some time ago, socially responsible movement, if you like, thinking about certain activities that investors wanted to exclude from holdings in their portfolio, so things like alcohol consumption or tobacco manufacturing and distribution. More recently, certain other things are excluded and looked at by investors - things like fossil fuels with an eye on climate; investors are also concerned with human rights and how people are treated. Since those early days, it's really broadened out, and today we're thinking about a discussion around a whole range of ESG factors and that's how a company performs around their environmental performance, how they do socially, on matters such as human capital and how they're governing in the boardrooms and how management teams act on behalf of shareholders such as ourselves. So, it has really broadened out over the last two decades I would say. In terms of how we think them, look ESG analysis is part of our investment process, it's key to making sensible investment decisions. So Perpetual thinks of ESG very much as an extension of our business quality filter and how we think about companies through that lens. It can help us make better decisions in thinking about risks of how our companies are performing and where they may be running into trouble if they're not performing well, but also where there could be opportunities as the worlds change and how our companies might be able to capitalise on that so that's obviously a very fundamental part of our process whether running an ESG-labeled fund or otherwise. Perpetual is also, we're stewards of other people's money. We see it as a very important role to be active owners. So using our position to engage with companies and influence companies where we think it's necessary on behalf of the unit holders, it's a critical part of our role and that's all part of the umbrella of ESG investing.
Tim [00:02:34] Thank you, Nathan and from an investor perspective, I mean, how have investors come along this journey to date? Where have you seen the biggest shifts in investor sentiment towards ESG, I guess more broadly?
Nathan [00:02:45] Sure, so it's been an evolution, and certainly investors have been somewhat reluctant. Others have been right at the forefront. I'd say in terms of where people are most heavily focused or have been and traditionally associated ESG with is climate, obviously, it's a large change and the volatility and changing climate is something that we all have to deal with and so that's been a really key focus. I'd say more recently, there has been increasing awareness of some of the social factors so whether it's human rights, employee relations, things of that nature; I think that's getting greater awareness. I would argue governance, even though it's seen as a pillar of ESG, has always been ever present that's always been critical to our process and I think always been a focus of investors. But I think if you were to look back a couple of years, probably the whole focus was on very much the E, where I think that's broadening out now to more of the S as well.
Tim [00:03:44] Now, from a performance perspective, how do ethical screens impact on both short-term and long-term performance?
Nathan [00:03:50] Look, in the short-term, they can, because if you exclude certain sectors of the market within bigger market cycles, there are always smaller market cycles and if you exclude a certain sector that can have an impact on short-term performance. But I'd argue that's very much in the short-term. I'd argue over the long-term through a longer market cycle, I don't think there's any discernible impact. Some studies have shown very, very long periods of time, going a hundred years if you were to exclude certain sectors actually doesn't have much of an impact on return. I certainly don't think there's any evidence to suggest that excluding certain sectors will detract from investment performance. Look, our fund has had some success over its nearly two-decade track record. In fact, I think the 20 years is coming up in April. But touching on the first question, Tim, I think when you have a clear focus and a clear process around ESG and how it impacts your decision making and risk reward, I think it follows that if you do that well, then it absolutely can add value to the investment performance over the longer-term.
Tim [00:04:55] So on that same theme, from an investor perspective, how do you drive the change from a potentially a short-term view to a more long-term focus on that performance and the good overall?
Nathan [00:05:06] Yes, look, this can be challenging because some investors do have very short-term time horizons. When we put out our fund marketing and documents we always talk long-term time horizon, but that is often harder to achieve than it is to put it down on a piece of paper. But look, we are fundamentally at Perpetual, we see ourselves as long-term holders of companies. Anyway, things can change and if we made a mistake, for example, we can sell a stock or if something material changes, we can move on to a stock. But fundamentally, we aim to be relatively long-term owners of companies and we try and take a long-term view. So anything we're thinking about any ESG matter or other business matter, we're very much trying to take a long-term focus, and we encourage and we try and explain to our clients how we go about things and they should be coming along the journey with us and not to be too focused on the short-term.
Tim [00:05:56] Agreed, in terms of the broader industry, what steps do you see asset managers taking, as a whole, to create a sustainable and thriving industry in this space?
Nathan [00:06:06] Look, I think we're seen various initiatives at an industry level. There's the Net Zero Asset Managers Initiative. In fact, there are a few those that go by slightly different names. The industry funds have been leaders in this space at trying to drive change. There's definitely a movement across the industry be it through any number of groups. I think there's acknowledgement that financial return is obviously key, but there are other matters at play as well and indeed returns to equity holders are a function of trying to best manage all your stakeholders, your customers, employees, suppliers, governments, the environment and the impacts on the environment in which you're working and the communities in which you work. So I think there's a broader acknowledgement from the industry at large that there's more to it than just a pure financial return or to think of it in another way that those returns to equity holders need to be a balance because you can't get them if you're not looking after the rest of the stakeholders that I just mentioned. I think you're seeing more from the industry also, I think you might see more from regulation. So obviously the Europeans are probably at the forefront of this in terms of how they're thinking about sustainability in their taxonomy. I think you'll see increasing regulation. So it won't just be industry-led, but I think it'll also be government-led kind of pushing the industry in a certain direction as well.
Tim [00:07:24] Now, given your active management style, do you have a view as to the most appropriate investment structure to housing ESG-informed or empathetic type strategy?
Nathan [00:07:34] Look, I'd say that there are a couple of different structures you could consider. Now, recently we've just launched our ethical fund as an ETF on the exchange only last November. We also have an unlisted unit trust. For me, the really important thing Tim is just to give our clients choice. I think there are pros and cons of each. I think the ETF has some unique characteristics around ease of dealing, and sign up, so less paperwork, someone can deal straight to their broker, quick settlement, good liquidity on market. So there are a number of advantages from our perspective. It's really all about giving our clients the option to invest as when they see fit in the vehicle that's most convenient for them. But I'd say, like it's really exciting to have just launched the ETF, I think it's a great addition to our products suite. I think it is a great option for our investors.
Tim [00:08:23] Yes, I agree, I think it helps you tap into a whole new segment of investors as well, which is obviously fantastic for the future.
Nathan [00:08:30] Absolutely, so those different channels to market, I mean, as I said, we offer both, both are great. I'm actually an investor in both unit classes across both vehicles. I think the ETF is attractive in that it's just easy. You can go in with your broker, trade online, there is T+2 settlement. It's really hassle free and there's good transparency; the indicative net asset value is updated regularly, so there's great transparency. Holdings are released on a quarterly basis, so I think it's a really good option for investors.
Tim [00:09:04] And looking forward, what excites you more about the future developments in Australia in this space?
Nathan [00:09:08] Look, I think opportunity, there'll always be opportunity with any great change at an industry level. So, for example, a net zero carbon transition or the energy transition and some of the changes that are happening there. There are always going to be some companies that are impacted but also going to be companies where there's great opportunity and that's what we're trying to sift out. I mean, we're trying to make the world a better place, but also see how we can benefit for our unit holders. And with any period of great change there are always great opportunities to be found and that's what excites me and gets me going in the morning.
Tim [00:09:45] Excellent, all right, we'll finish up there, Nathan, thank you very much for all of your perspective and your insights. Good luck with the fund and thank you to everybody for listening as well. You can find a range of market insights and thought leadership online at statestreet.com and we look forward to sharing new insights in our next edition. Thank you.
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